Maximizing Retirement Savings: Can You Deduct Solo 401k and Traditional IRA Contributions?

For many individuals, the question of whether they can take a Solo 401k deduction that reduces their MAGI/AGI to 109K MFJ (Married Filing Jointly) and still contribute to a traditional IRA is a crucial one. This article aims to provide clarity on this matter, highlighting the important considerations and the steps involved.

Solo 401k Contributions

A Solo 401k, also known as a Self-Employed 401k, is a type of retirement plan available to self-employed individuals or small business owners with no full-time employees, apart from the business owner and their spouse. Contributions to a Solo 401k can be made in two forms:

Employee Deferrals

Employee deferrals can be up to $22,500 in 2023, or $30,000 if you are age 50 or older.

Employer Contributions

Employer contributions can be up to 25% of your compensation.

These contributions are tax-deductible, which can help reduce your AGI/MAGI. For example, if your MAGI/AGI is reduced by these contributions, it can open up opportunities for additional tax deductions that may not be available otherwise.

Traditional IRA Contributions

You can still contribute to a traditional IRA even if you have a Solo 401k. For 2023, the contribution limit for an IRA is $6,500, or $7,500 if you are age 50 or older. Traditional IRA contributions are generally tax-deductible, but the deductibility depends on your MAGI and whether you are covered by a workplace retirement plan.

Deductibility of IRA Contributions

Whether you can deduct your traditional IRA contributions depends on your MAGI and whether you or your spouse is covered by a workplace retirement plan. Specifically:

- If your MAGI is below $198,000 for MFJ, you can deduct the full amount of your traditional IRA contributions. - If your MAGI is between $198,000 and $208,000, the deduction phases out. - If your MAGI is above $208,000, you cannot deduct your traditional IRA contributions.

Given your target of keeping your AGI/MAGI below $109,000, as long as you meet all other requirements, you should be eligible for a full deduction for your traditional IRA contributions.

Summary

Yes, you can take a Solo 401k deduction and also contribute to a traditional IRA. Your ability to deduct IRA contributions depends on your MAGI and whether you are covered by another retirement plan. If your AGI/MAGI is below $109,000, you should be eligible for a full deduction for your traditional IRA contributions.

Always consider consulting a tax professional for personalized advice and to ensure compliance with the latest tax laws.

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